Wondering what is Title Insurance? Let’s see if our title insurance definition helps you understand it 100%:
It is a policy required of home buyers by lenders, to protect against losses arising from problem and disputes over the ownership of a property. These policies are issued by a title insurance company, and – because of the need to examine local records – those companies usually operate exclusively in a specific geographic area.
But is there such a need?, you ask. Isn’t an affidavit of title enough?
Oh, yes, there is such a need. Let us explain why:
A home (and the land on which it stands) may go through several ownership changes. The affidavit of title of the latest home seller might not be enough to cover problems from decades ago. There may be a weak link at any point in that chain of title that could emerge to cause trouble. For example: someone along the way may have forged a signature in transferring a title. Or there may be unpaid real estate taxes and other encumbrances. So,when answering what is title insurance, one should say it’s a policy that covers the insured party from any claims and legal fees that arise out of such title problems. Moreover, it protects a purchaser if there is a defect in the title - such as a lien against the property - that was not discovered at the time of purchase.
Most policies only protect against losses arising from events that occurred prior to the date of the policy. Coverage ends on the day the policy is issued and extends backward in time for an indefinite period. This is in marked contrast to property or life insurance, which protect against losses resulting from events that occur after the policy is issued, for a specified period into the future. They look to reduce losses by finding and fixing defects before the policy is issued, in much the same way as firms providing elevator or boiler insurance. On a title insurance policy, the owner's protection lasts as long as the owner or any heirs have an interest in or any obligation with regard to the property. When they sell, however, the lender will require the purchaser to obtain a new title insurance policy. That protects the lender against any liens or other claims against the property that may have arisen since the date of the previous policy.
The cost of providing title insurance is not much different for a small policy than for a large one. The reason is the aforementioned fact that most title insurance costs arise in preventing loss rather than paying claims, and prevention costs are not related to the size of a policy. Despite this, premiums are scaled to the amount of coverage, the amount of the mortgage, or the value of the property, which suggests that smaller policies may be underpriced and larger policies overpriced. The cost of title insurance also varies widely from one area to another. In some areas, the premium covers not only protection against loss but also the costs of search and examination, as well as closing services. In other areas, the premium covers protection only, and borrowers pay for the other related services separately. To complicate it further, in some states the charges for title-related services are paid to insurance companies, which perform the functions but charge separately for them. In other states, borrowers may pay attorneys or independent companies called abstractors or escrow companies. Of course, what matters to the borrower is the sum total of all title-related charges. These also differ from one area to another in response to a variety of factors. The 50 states have 50 different regulatory regimes, which affect charges. So do local costs, competition in local markets, and other factors.
Most borrowers leave it to one of the professionals with whom they deal - real estate agent, lender, or attorney - to select the insurance carrier. This means that competition among title insurers is largely directed toward these professionals who can direct business rather than toward borrowers. Borrowers may be able to save money by shopping for title insurance themselves, although it is difficult to generalize because, like we said, market conditions vary state by state, and sometimes within states.
States that do not regulate title insurance rates: Alabama, District of Columbia, Georgia, Hawaii, Illinois, Indiana, Massachusetts, Oklahoma, and West Virginia.
States that set the prices for all carriers: Texas and New Mexico. Florida also sets title insurance premiums but not other title-related charges, which can vary.
In the remaining states, the situation is murky and it may or may not pay to shop. Insurance premiums are the same for all carriers in “rating bureau states'': Pennsylvania, New York, New Jersey, Ohio, and Delaware. These states authorize title insurers to file for approval of a single rate schedule for all carriers through a cooperative entity. Yet, in some, there may be flexibility in title-related charges. More promising are 'file and use' states (all the other states that were not mentioned above) which permit premiums to vary among insurers.